Last night, the Senate passed a bill to address the doubling of the interest rate on new subsidized Federal Stafford loans.
The Congressional Budget Office (CBO) estimated that the legislation will save the federal government $715 million over ten years, which would be applied to deficit reduction. Many feared that the multi-partisan Senate deal would fall apart because the CBO found that an earlier version would cost $22 billion over ten years.
Under the Senate-approved legislation, interest rates on new loans each July 1 would be based on the last 10-year Treasury auction in the previous May. The specific interest rates would be as follows:
- Undergraduate Students (Subsidized and Unsubsidized Federal Stafford Loans): 10-year Treasury + 2.05% with an 8.25% cap
- Graduate and Professional School Students ( Federal Stafford Loans and Federal Grad PLUS Loans): 10-year Treasury + 3.6% with a 9.5% cap
- Parents (Federal Parent PLUS Loan): 10-year Treasury + 4.6% with a 10.5% cap
Based on the current 10-year Treasury rate, this would yield interest rates of 3.9%, 5.4% and 6.4%, respectively, for new loans this year, made after July 1, 2013.
According to Mark Kantrowitz, publisher of Edvisors, “This is still an interest rate increase masquerading as a decrease. Interest rates are at historically low levels and have nowhere to go but up. We can expect interest rates to start increasing by about 1.5% per year in 2015.” These federal educational loan rates are expected to climb as the economy improves and it becomes more expensive for the government to borrow money. Thus, interest rates on new loans will probably exceed the current 6.8% rate in 2017 and certainly by 2020. “So, while students enrolling in college now will save money on their student loans, their younger siblings will pay a lot more. A few years from now students and parents will be demanding a return to fixed 6.8% interest rates.”